"Let
me tell you about an incredible ground-level business opportunity," and
you are invited to a house or to lunch for "a discussion." Funny
enough, you feel sick in your gut that there is some hidden agenda or
deception. "Probably a multi-level marketing (MLM) organization," you
think. Suppose it is? Should you trust your instincts? Is there
anything wrong with MLM?

This article will analyze four problem areas with MLM. Specifically, it will focus on problems of

A
tutorial on market saturation hardly seems necessary in most business
discussions, but with MLM, unfortunately, it is. Common sense seems to
get suspended when considering if MLMs are viable, even theoretically,
as a profitable means of distribution for all parties involved. This
suspension is created by a heightened expectation of "easy money," but
more on that later.

New, Innovative?

MLM
can no longer claim to be new and, thus, exempt from the normal rules
of the market and the way goods and services are sold. They have been
tried and, for the most part, have failed. Some have been miserable
failures in spite of offering excellent products.

Marketing
innovations are not rare in the modern world, as evidenced by the
success of Wal-Mart, which found a more efficient and profitable way to
distribute goods and services than the status quo, providing lasting
value to stockholders, employees, distributors, and consumers. But this
is not the case with any MLM to date, and after 25 years of failed
attempts, it is time to point out the reasons why.

Don't Some People Make Money in MLM?

First,
we will analyze the "driving mechanism" of MLMs. We will detail how
they are intrinsically unstable, guaranteed by design to oversaturate
the market with no one noticing. We will look at why MLMs can never
equalize into profitability the way companies in the real world can, so
that the result will be that the organization as a whole cannot, even
in theory, be profitable. When this inevitable destiny occurs, the only
money to be made is not from the product or service but from the losses
of people lower down in the organization.

Thus
the MLM organization becomes exploitative, and many high-level MLM
promoters have been shut down, the "executives" incarcerated, for
selling the fraud of impossible success to others. Other, larger MLMs
have survived by hiring large batteries of attorneys to ward off
federal prosecutors, even bragging about the funds they have in reserve
for this purpose.

The
unfortunate "distributor" at the bottom is the loser, and once this
becomes apparent beyond all the slick videotapes and motivational
pep-talks, good people start to get a bad taste in their mouths about
the whole situation.

So,
yes, money can be made with MLM. The question is whether the money
being made is legitimate or "made" via a sophisticated con scheme. And
if MLM is "doomed by design" to fail, then the answer is,
unfortunately, the latter.

But how exactly does this happen, and must it always?

Doomed by Design?

The
first question is this: Is any company choosing this marketing strategy
destined to fail, to degenerate into an exploitative venture,
regardless of how good the product is?

To
see this clearly we must go through an, otherwise, obvious and
elementary discussion of how any business must be careful not to
overhire, overextend, or oversupply a market.

The Real World

Any
business must carefully consider supply and demand. For example, if the
ReVo Corporation thinks that it will have a full-fledged fad on their
ovoid sunglasses next summer, perhaps they should plan to build and
distribute, say, 10M units. This involves gearing up factories, setting
up distribution and dealer networks, and carefully managing the
inventories at each level so that ReVo will still have credibility with
their distributors, retail outlets, and the public the following year.

If
it turns out that there is a "run" on ReVo products, and they sell out
in mid-June, then they have miscalculated demand and will miss out on
profits they could have made. The more serious problem, however, is
overestimating the saturation point for the product. If they make 10M
units, and sell only 2M units, this may be the end of ReVo as a company.

The
all-too-obvious point here is that management of supply and demand, and
keen insight into realistic market penetration and saturation are
crucial to any business, for any product or service. Mismanagement of
this aspect of a business will eclipse good market access, excellent
product design, human resource assets, production quality, and so on.
Simply stated, a failure to "hit the target" of supply and demand can
ruin a company if the market is oversaturated.

Market Dynamics and the End of the Cold War

Interestingly,
the issue of supply and demand is what brought the USSR to its knees.
By design, the Soviet government tried to macro-manage supply, where
bureaucrats would decide how many potatoes were needed, how much toilet
paper, etc. Assuming these bureaucrats did the best they could,
unfortunately their efforts to deliberately manipulate the control
"knob" of supply and demand was not good enough. Notwithstanding their
good intentions, they were usually wrong, which created huge shortages
and surpluses, and led to a massive economic collapse.

Seeing
the disastrous end of market naiveté in Russia should help clarify the
fundamental problem with the MLM approach. In the real world, the
profit of a company is directly related to the skill and prescience of
the "hand" on the "supply knob," so to speak. In the USSR, that "hand"
could not react fast or accurately enough to market realities through
the best efforts of the bureaucrats.

With
MLMs, the situation is much worse. Nobody is home. Even the Soviets had
someone thinking about how much was enough! If the bureaucrat in Russia
was having a hard time trying to play Adam Smith's "invisible hand" in
setting the supply level in the Soviet Union, then an MLM "executive"
is in a truly unfortunate position. Not only is there no one assigned
to make the decision of how much is enough, the MLM is set up by design
to blindly go past the saturation point and keep on going. It will grow
till it collapses under its own weight, without even a bureaucrat
noticing.

MLM is like a train with no brakes and no engineer headed full-throttle towards a terminal.

"Everyone Will Want to Buy This Product!"

All
products and services have partial market penetration. For example,
only so many people wish to use a discount broker, as evidenced by the
very successful but only partial market penetration of Charles Schwab.
Not everyone wishes to join a particular discount club, or buy gold, or
drink filtered water, or wear a particular style of shoe, or use any
product or service. No one in the real world of business would
seriously consider the thin arguments of the MLMers when they
flippantly mention the infinite market need for their product or
services.

The Demand Problem: Of Widgets and MLMs

Imagine
a neat new product called a Widget that will sell for $100 (a fixed
price, to keep it simple). Now, while everyone could use a Widget, not
everyone will. Some will be afraid of anything new. Some will be loyal
to existing brands. Some will want to buy an inferior product for less
money. Some will want a more expensive product for prestige, regardless
of quality. The reasons go on and on, and the fact is that only "X"
Widgets will sell at $100.

The
question for would-be marketeers is... what is "X," and how can it be
predicted to maximize profits? The fact that "X" is hard to pin down
does not mean that it does not exist, and every Widget built beyond "X"
will end up producing a problem for the organization. The market only
wants "X" Widgets at $100. What are you going to do with your extra
inventory of Widgets beyond "X" that no one wants, and the sales people
you hired to sell them?

No
one can perfectly predict "X," and the situation is not nearly as
simple as considered here, but the objective for marketeers is to
forecast "X" as closely as possible in order to provide lasting value
to all parties involved: to avoid missed opportunities as well as
waste, loss, or failure.

The MLM Forecasting Approach: Ignoring the Target

Who
has an eye on "X," the point of market saturation at a given price, in
an MLM? Well, the funny thing, or perhaps the tragic thing, is that "X"
will be reached and exceeded without anyone noticing or caring.

Let's
just suppose that "X" has been reached today in a particular MLM; the
number of possible units sold at this price has just been exceeded, and
you happen to be a starry-eyed prospect sitting in an MLM meeting
listening to the pitch. Now consider: Does anyone in this company know
about "X"? Does anyone care? Is the issue being suppressed on purpose
for some other motive? Since we are supposing that the market
saturation number "X" has been reached, everyone joining the MLM from
now on is buying into a false hope. But that is not what the speaker
will be saying. He will be telling you, "Now is the time to join. Get
in on the 'ground floor'." But it is all a lie, even though the speaker
may not know it. The total available market "X" has been reached and
nobody noticed. All the distributors will lose from here on out. Could
this be you? How could you possibly know at what point you will become
the liar in an MLM?

Pop or Drop

Perhaps
a better paradigm than the runaway train analogy offered earlier of how
MLMs perform over time is this: a helium balloon let loose in an empty
room with a spiked ceiling, where product quality is analogous to the
amount of helium. The better the product, the faster the balloon will
rise, accelerating unhindered, towards disaster. The other option would
be the case of a lousy product, in which case the balloon will sink of
its own accord, never getting off the ground. To be sure, equilibrium
is not in the cards, except perhaps as an accident, and then only
temporarily. MLMs are intrinsically unstable. For any company that
chooses an MLM approach, it's pop or drop.

MLMs vs. the Real World

The
basic question that needs to be asked is this: If this product or
service is so great, then why isn't it being sold through the customary
marketing system that has served human society for thousands of years?
Why does it need to resort to a "special marketing" scheme like an MLM?
Why does everyone need to be so inexperienced at marketing this! Is the
product just a thin cover for what is really a pyramid scheme of
exploiting others? But more on that later.

From Contracted, Protected Distribution... to Mayhem

Imagine
that Wendy's became suddenly possessed by the idea that "everyone needs
to eat," and opened four Wendy's franchises on the four corners of an
intersection in your neighborhood. Who would benefit from this folly?
The consumer? Certainly not the franchises; they would all lose.
Wendy's corporate? Perhaps temporarily, by speculative inventory sales
while the unfortunate franchises were under the delusion that they
could all make money. But in the end, the negative image of four
outlets dying a slow death would likely offset the temporary inventory
sales bubble. Even the most unreflective of the hapless franchisees
would think twice about doing business in such a manner again. This is
why real-world distributorships and franchises are contractually
protected by territory and/or market.

Again,
the simple fact is that even the most successful products will have
partial market penetration. The same is true for services. Demand and
"market share" are finite, and to overestimate either is catastrophic.

So
why are MLM promoters obscuring this? Who is in control of the supply
"knob," carefully and skillfully managing the size of the distribution
channels, number of salespeople, inventory, etc., to insure the success
of all involved in the business? The truth is chilling: nobody.

Imagine
trying to write a computer model of how MLMs work, and you will see
this point most vividly. An MLM could never work, even in theory. Think
about it.

The People Machine

Chernobyl had a control system that failed. MLMs have no control mechanisms at all.

Where
is the "switch" that can be flipped in an MLM when enough sales people
are hired? In a normal company a manager says, "We have enough, let's
stop hiring people at this point." But in an MLM, there is no way
to do this. An MLM is a human "churning" machine with no "off button."
Out of control by design, its gears will grind up the money, time,
credibility, and entrepreneurial energy of well-meaning people who
joined merely to supplement their income. Better to just steer clear of
this monster to begin with.

There
is simply no way to avoid the built-in failure mechanism of MLMs. If a
company chooses to market this way, it will eventually "hire" (with no
base pay and charging to join) far too many people.

Thus,
the only "control system" will be the inevitable losses and subsequent
bad image the MLM company will gain after it does what it was designed
to do: fail. And sooner or later we have got to stop blaming this particular MLM company or that, and admit that the MLM technique itself is fundamentally flawed.